Sukuk experienced a fantastic growth but has not been immune to the financial crisis

Sukuk implementation structures and parameters

The future for sukuk is full of challenges and constraints...

Standardization, legal transparency and regulation, liquidity: keys to the emergence of a mature, global sukuk market

Positive expectations amid more complexity

Global capital markets have long been functioning without Islamic components. Only recently have they been subject to the emergence of a new dimension: the sukuk (Islamic Bond) market. The sukuk market has experienced a spectacular growth since 2001 in the Middle East, supported by ultra-high petro-derived liquidity levels, which have fuelled by a growing demand for Islamic financial services and propelled the number of Islamic issuers within the region. However, the sukuk market has not been immune to the recent financial crisis, and the activity has notably slowed amidst difficult global market conditions. This has allowed the market some time for reflection on a number of specific issues, which have gradually emerged and will need to be solved. Although the long term outlook for the industry remains bullish, with the potential demand for sukuk likely to far outstrip available supplies, the future for sukuk remains full of challenges and constraints.

[...] -This calls for the creation of a Shari'ah compliant inter-bank money market and other short term Shari'ah compliant liquidity instruments, which would not only create a secondary/ liquid market for sukuk but also boost Islamic banks' profitability. The 200% oversubscription of the short term sukuk issued by the Central Bank of Bahrein demonstrates investors' appetite for this type of instruments. more detailed yield curve with a complete structure of issues needs to be built by sovereigns and governments related issuers. [...]

[...] -On a practical basis, until there is some broad consensual standardization on the substance of the underlying sukuk and terminology, investors will need to look at each structure individually to properly assess the cash flow generation and the risk/return profile of a sukuk. Investors have to bear in mind that the risk/ return characteristics of a sukuk can vary significantly within a particular sukuk type, irrespective of the type of structure used. -Overall, standardization will help cut the costs of Islamic products, increase their attractiveness and encourage the emergence of a truly integrated global market for sukuk. [...]

[...] This is a long-awaited step that should help creating a stronger and more efficient sukuk market in the longer term and developing a more detailed yield curve, hence a risk benchmark across several tenors and credit profiles. Sukuk structures have been tested for the first time with notably East Cameron Partners (originator of a $166m asset-backed sukuk) filing for Chapter 11 in Oct.08 and Nakheel (originator of a $4bn asset-based sukuk) seeking to restructure its debt in Nov.09. This raised the key question of asset ownership or realization of the security under stress. [...]